Final project 3


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comparative analysis on NPA

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Final project 3

  1. 1. Executive summaryThe future of Indian Banking represents a unique mixture of unlimited opportunities amidstinsurmountable challenges. On one hand, we see the scenario represented by the rapidprocess of globalization presently taking shape bringing the community of nations in theworld together, transcending geographical boundaries, in the sphere of trade and commerce,and even employment opportunities of individuals. All these indicate newly emergingopportunities for Indian Banking.But on the darker side we see the accumulated morass, brought out by three decades ofcontrolled and regimented management of the banks in the past. It has siphoned profitabilityof the banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks andtheir continued stability. In the nutshell the problem is how to shed the legacies of the pastand adapt to the demands of the new age.The accumulation of huge non-performing assets in banks has assumed great importance.The depth of the problem of bad debts was first realized only in early 1990s. The magnitudeof NPAs in banks and financial institutions is over Rs.1, 50,000crore.The project has tried to analyze the present situation in Indian banks. With the process ofliberalization and globalization, the bank credit has witnessed spectacular growth as a catalystof economic growth. With the increase in the growing volume of credit, the volume ofimpaired credit has also multiplied due to various factors. This burgeoning level of NPA hadbecome a grave matter of concern for the Indian banks.In the study conducted focus was laid on the approach of various banks to manage NPAs, theprocess of identification of the same, the classification and assessment of provisions and thepre-sanction appraisal methodology and the post-sanction follow-up procedure.The nature of research was descriptive as well as exploratory as the study was aimed atstudying the various measures adopted by banks for management of NPAs in the bankingsector. 1 Alliance Business Academy
  2. 2. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actualburden of banks. Now it is increasingly evident that the major defaulters are the bigborrowers coming from then on-priority sector. The banks and financial institutions have totake the initiative to reduce NPAs in a time bound strategic approach.Public sector banks figure prominently in the debate not only because they dominate thebanking industries, but also since they have much larger NPAs compared with the privatesector banks. This raises a concern in the industry and academia because it is generally feltthat NPAs reduce the profitability of a bank, weaken its financial health and erode itssolvency.For the recovery of NPAs a broad framework has evolved for the management of NPAsunder which several options are provided for debt recovery and restructuring. Banks and FIshave the freedom to design and implement their own policies for recovery and write-offincorporating compromise and negotiated settlements. 2 Alliance Business Academy
  3. 3. 1. IntroductionNPA: The three letters Strike terror in banking sector and business circle today. NPA is shortform of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest orother due to a bank remains unpaid for more than 90 days, the entire bank loan automaticallyturns a non performing asset. The recovery of loan has always been problem for banks andfinancial institution. To come out of these first we need to think is it possible to avoid NPA,no cannot be then left is to look after the factor responsible for it and managing those factors.1.1Definitions:An asset, including a leased asset, becomes non-performing when it ceases to generateincome for the bank.A „non-performing asset‟ (NPA) was defined as a credit facility in respect of which theinterest and/ or instalment of principal has remained „past due‟ for a specified period of timeWith a view to moving towards international best practices and to ensure greatertransparency, it has been decided to adopt the „90 days’ overdue’ norm for identification ofNPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004,a non-performing asset (NPA) shall be a loan or an advance where;  Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,  The account remains „out of order‟ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,  Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes.As a facilitating measure for smooth transition to 90 days norm, banks have been advised tomove over to charging of interest at monthly rests, by April 1, 2002. However, the date of 3 Alliance Business Academy
  4. 4. classification of an advance as NPA should not be changed on account of charging of interestat monthly rests. Banks should, therefore, continue to classify an account as NPA only if theinterest charged during any quarter is not serviced fully within 180 days from the end of thequarter with effect from April 1, 2002 and 90 days from the end of the quarter with effectfrom March 31, 2004.Banking:„Banking‟ as defined in the Section 5 (b) of the Banking Regulations Act, 1949 is thebusiness of "Accepting deposits of money from the public for the purpose of lending orinvestment". These deposits are repayable on demand or otherwise, and withdraw able by acheque, draft, and order or otherwise.1.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIATo start with, performance in terms of profitability is a benchmark for any business enterpriseincluding the banking industry. However, increasing NPAs have a direct impact on banksprofitability as legally banks are not allowed to book income on such accounts and at thesometime are forced to make provision on such assets as per the Reserve Bank of India (RBI)guidelines. Also, with increasing deposits made by the public in the banking system, thebanking industry cannot afford defaults by borrower s since NPAs affects the repaymentcapacity of banks.Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the systemthrough various rate cuts and banks fail to utilize this benefit to its advantage due to the tearof burgeoning non-performing assets.1.3 FACTORS FOR RISE IN NPAsThe banking sector has been facing the serious problems of the rising NPAs. But theproblem of NPAs is more in public sector banks when compared to private sector banks andforeign banks. The NPAs in PSB are growing due to external as well as internal factors. 4 Alliance Business Academy
  5. 5. 1.3.1EXTERNAL FACTORS:-  Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, thereby reducing their profitability and liquidity.  Willful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.  Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.  Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. 5 Alliance Business Academy
  6. 6.  Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non- recovered part as NPAs and has to make provision for it. Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co- operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.1.3.2INTERNAL FACTORS:- Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity 6 Alliance Business Academy
  7. 7. iii. Principles of profitability i. Principles of safety :- By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a) Capacity to pay b) Willingness to pay a) Capacity to pay depends upon: 1. Tangible assets 2. Success in business b) Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .He should be a person of integrity and good character. Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper SWOT analysis 7 Alliance Business Academy
  8. 8. The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. Banks should consider the borrowers own capital investment. it should collect credit information of the borrowers from_ a. From bankers. b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies. Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing. Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_ 8 Alliance Business Academy
  9. 9. 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.1.4 PROBLEMS DUE TO NPA 9 Alliance Business Academy
  10. 10. 1. Owners do not receive a market return on their capital .in the worst case, if the banks fails, owners lose their assets. In modern times this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors lose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. Nonperforming loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labor and natural resources.Nonperforming asset may spill over the banking system and contract the money stock, whichmay lead to economic contraction. This spillover effect can channelize through liquidity orbank insolvency:a) When many borrowers fail to pay interest, banks may experience liquidity shortage. Thiscan jam payment across the country.b) Illiquidity constraints bank in paying depositorsc) Undercapitalized banks exceed the bank‟s capital base.Out of Order status: An account should be treated as out of order if the outstanding balance remainscontinuously in excess of the sanctioned limit/drawing power. In cases where the outstandingbalance in the principal operating account is less than the sanctioned limit/drawing power, butthere are no credits continuously for six months as on the date of Balance Sheet or credits arenot enough to cover the interest debited during the same period, these accounts should betreated as out of order. 10 Alliance Business Academy
  11. 11. ‘Overdue‟: Any amount due to the bank under any credit facility is „overdue‟ if it is not paidon the due date fixed by the bank.1.5 Types of NPAA] Gross NPAB] Net NPAA] Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBIguidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made bybanks. It consists of all the non-standard assets like as sub-standard, doubtful, and lossassets.It can be calculated with the help of following ratio:Gross NPAs Ratio Gross NPAsGross AdvancesB] Net NPA:Net NPAs are those type of NPAs in which the bank has deducted the provision regardingNPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheetscontain a huge amount of NPAs and the process of recovery and write off of loans is verytime consuming, the provisions the banks have to make against the NPAs according to thecentral bank guidelines, are quite significant. That is why the difference between gross andnet NPA is quite high.It can be calculated by following 11 Alliance Business Academy
  12. 12. Net NPAs  Gross NPAs – Provisions Gross Advances - Provisions1.6 GLOBAL DEVELOPMENTS AND NPAsThe core banking business is of mobilizing the deposits and utilizing it for lending toindustry. Lending business is generally encouraged because it has the effect of funds beingtransferred from the system to productive purposes, which results into economic growth.However lending also carries credit risk, which arises from the failure of borrower to fulfillits contractual obligations either during the course of a transaction or on a future obligation.A question that arises is how much risk can a bank afford to take? Recent happenings in thebusiness world -Enron, WorldCom, Xerox, Global Crossing do not give much confidence tobanks. In case after case, these giant corporate becan1e bankrupt and failed to provideinvestors with clearer and more complete information thereby introducing a degree of riskthat many investors could neither anticipate nor welcome. The history of financial institutionsalso reveals the fact that the biggest banking failures were due to credit risk. Due to this,banks are restricting their lending operations to secured avenues only with adequate collateralon which to fall back upon in a situation of default. 12 Alliance Business Academy
  13. 13. 2.1 BACKGROUND:Banking system which constitutes the core of the financial sector plays a vital role intransmitting monetary policy impulses to the economic system. Therefore its efficiency anddevelopment are vital for enhancing growth and improving the changes for stability. Duringthe recent past, profits of the Bank came under pressure due to rise in interest rates, decreasein non-interest income and increase in provisions and contingencies.2.2LITERATURE REVIEWIn presence of NPAs has affected the profitability, liquidity and competitive functioning ofbanks and finally the psychology of the bankers in respect of their disposition towards creditdelivery and credit expansion. Effects range from liquidity crisis, deposit runs and bankfailures that lead to writing off of non-performing loans, restructuring, mergers andacquisitions and even closer of weaker banks. The accumulation of huge non-performingassets in banks has assumed great importance. The depth of the problem of bad debts wasfirst realized only in early 1990s. The magnitude of NPAs in banks and financial institutionsis over Rs.1, 50,000crores.While gross NPA reflects the quality of the loans made by banks, net NPA shows the actualburden of banks. Now it is increasingly evident that the major defaulters are the bigborrowers coming from the non-priority sector. The banks and financial institutions have totake the initiative to reduce NPAs in a time bound strategic approach.Lepley, William (1998) in his article “Systematic Risk, Total risk and bank risk assessment”states that in bank finance, the risk assessment of individual loans appears to be based ontotal risk rather than systematic risk. Research found that total risk will reduce firm value byquicker liquidation leading to bankruptcy. 13 Alliance Business Academy
  14. 14. Giampaola, Gabbi (2000) in his article “Measuring liquidity risk on a Banking” states that tomitigate risk, a comparison between the potential loss produced by the individual financialpositions using VAR, it is possible to figure the capital required to bear maximum loss. Theintegration of financial flows makes it possible to find a higher efficient frontier.Thirwell, John (2002) in his article “Operational risk, the banks and the regulators struggle”states that the research was conducted to know the awareness of the banks about theoperational risk and its management. The research found that the operational risk is not themean of distribution curve. It is the level of future loss.Fthemi, Ali and Fooladi, Iraj (2006) in their article “Credit risk management- A survey ofpractices” states that the purpose is to shed light on current practices of financial institutions.The research found that identifying counter party default risk is the single most importantpurpose served by the credit risk models. Only few banks use vendor-marketed model formanaging credit risk.Waseem, Ahmed (2006) in his article “Non-Performing Assets (NPAs) in Banks” states thatwith the liberalization of economy, banking industry is facing several challenges giving riseto NPAs. It depends on the quality of the credit risk management of banks. NPAs have directimpact on banks profitability, building up stress on management.Pillai, Manoj (2007) in his article “ARCIL and management of NPAs of Indian Banks” statesthat presence of NPAs has had an adverse impact on the productivity and efficiency of Indianbanks resulted in erosion of profits. The research found that during last 4 years the aggregateadvances increased by 104% but NPAs has reduced, and gives this credit to establishment ofARCIL.In 2009 Article “Are Banks stock sensitive to risk management?” states that the riskmanagement capabilities of banks have been improving overtime except for its last two years.The return through stocks is sensitive to risk management capabilities of banks.Article in livemint(2010)Mumbai: The Reserve Bank of India (RBI) has asked banks toprovide sector-wise details of their non-performing assets and exposures in the balance sheetsfrom this fiscal. The banks have also been asked to furnish details of any special purposevehicles sponsored by the banks. 14 Alliance Business Academy
  15. 15. According to analysts, the move would bring in more transparency in the banks‟operations.“It has been decided to prescribe the following additional disclosures in the „notesto accounts‟ in the banks‟ balance sheets...(like) concentration of deposits, advances,exposures and NPAs, sector-wise NPAs, overseas assets, NPAs and revenue, off-balancesheet SPVs sponsored by banks,” RBI said in an statement.Public sector banks figure prominently in the debate not only because they dominate thebanking industries, but also since they have much larger NPAs compared with the privatesector banks. This raises a concern in the industry and academia because it is generally feltthat NPAs reduce the profitability of banks, weaken its financial health and erode itssolvency. For the recovery of NPAs a broad framework has evolved for the managementof NPAs under which several options are provided for debt recovery and restructuring.Banks and FIs have the freedom to design and implement their own policies for recovery andwrite-off incorporating compromise and negotiated settlements.2.3 STATEMENT OF THE PROBLEM:“Comparative Analysis on Non Performing Assets Of Private And Public Sector Banks”“While The Banking Industry in India is progressively complying with the internationalprudential norms and Accounting practices, there are certain areas like recovery managementin which it does not have a legal playing field as compared to other participants in theInternational financial markets”2.4 NEED AND IMPORTANCE OF THE STUDY  The Banks and Financial Institutions have been burdened with ever increasing Non Performing Assets.  The recovery method of collection NPAs is not appropriate. 15 Alliance Business Academy
  16. 16. 2.5 OBJECTIVES OF THE STUDY:The basic idea behind undertaking the Grand Project on NPA was to:  To evaluate NPAs (Gross and Net) in different banks.  To study the past trends of NPA  To calculate the weighted of NPA in risk management in Banking  To analyze financial performance of banks at different level of NPA  To evaluate profitability positions of banks  To evaluate NPA level in different economic situation.  To Know the Concept of Non Performing Asset  To Know the Impact of NPAs  To Know the Reasons for NPAs  To learn Preventive Measures2.6 SCOPE OF THE STUDY:  Concept of Non Performing Asset  Guidelines  Impact of NPAs  Reasons for NPAs  Preventive Measures 16 Alliance Business Academy
  17. 17. 2.7 OPERATIONAL DEFINITIONS:  NPA: An asset is classified as non-performing asset (NPA‟s) if dues in the form of principal and interest are not paid by the borrower for a period of 90 days.  Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.  Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months.  Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful asset.  Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection  Statutory Liquidity Ratio (SLR): It is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.  Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks.2.8 RESEARCH METHODOLOGY Type of Research: The research methodology adopted for carrying out the study were  In this project Descriptive research methodologies were use.  At the first stage theoretical study is attempted. 17 Alliance Business Academy
  18. 18.  At the second stage Historical study is attempted.  At the Third stage Comparative study of NPA is undertaken. Type of Data: Secondary Data Source of data collection: Websites, Research Articles2.9 Limitations of the study:  It was critical for me to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible  Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector. 18 Alliance Business Academy
  19. 19. 3. Industry profile3.1Definition of Banking“In general terms, the business activity of accepting and safeguarding money owned byother individuals andentities, and then lending out this money in order toearn a profit.”Bank - An organization, usually a corporation, chartered by a state or federal government,which does most or all of the following:... MoreDeposit - Money given in advance to show intention to complete the purchase of a property.Loan - An arrangement in which a lender gives money or property to a borrower, and theborrower agrees to return the property or repay“A bank is a financial intermediary that accepts deposits and channels those deposits intolending activities. Banks are a fundamental component of the financial system, and are alsoactive players in financial markets. The essential role of a bank is to connect thosewho have capital (such as investors or depositors), with those who seek capital (such asindividuals wanting a loan, or businesses wanting to grow)”Section 6 of Banking Regulations Act, 1949 elaborately specifies the other forms of businesswhich a banking company may carry in addition to banking as defined in section 5. Some ofthese are mentioned below:  Issuing Demand Drafts & Travellers Cheques  Collection of Cheques, Bills of exchange 19 Alliance Business Academy
  20. 20.  Discounting and purchase of Bills  Issuing Letters of Credit & Letters of Guarantee  Sale and Purchase of Foreign Exchange  Custodial Services  Investment services3.2 HISTORY OF INDIAN BANKINGA bank is a financial institution that provides banking and other financial services. By theterm bank is generally understood an institution that holds a Banking Licenses. Bankinglicenses are granted by financial supervision authorities and provide rights to conduct themost fundamental banking services such as accepting deposits and making loans. There arealso financial institutions that provide certain banking services without meeting the legaldefinition of a bank, a so-called Non-bank. Banks are a subset of the financial servicesindustry.The word bank is derived from the Italian banca, which is derived from German and meansbench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refersto an out of business bank, having its bench physically broken. Moneylenders in NorthernItaly originally did business in open areas, or big open rooms, with each lender working fromhis own bench or table.Typically, a bank generates profits from transaction fees on financial services or the interestspread on resources it holds in trust for clients while paying them interest on the asset.Development of banking industry in India followed below stated steps.  Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest.  Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During 20 Alliance Business Academy
  21. 21. the days of the East India Company, was the turn of the agency houses to carry on the banking business. The General Bank of India was first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank Hindustan and the Bengal Bank. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established in 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India. The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in 1969. The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high-level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process. 21 Alliance Business Academy
  22. 22. 1. Comprises balance of expired loans, compensation and other bonds such as National Rural Development Bonds and Capital Investment Bonds. Annuity certificates are excluded. 2. These represent mainly non- negotiable non- interest bearing securities issued to International Financial Institutions like International Monetary Fund, International Bank for Reconstruction and Development and Asian Development Bank. 3. At book value. 4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of Non- Government In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system. These new banks had to satisfy among others, the following minimum requirements: (i) It should be registered as a public limited company; (ii) The minimum paid-up capital should be Rs 100 crore; (iii) The shares should be listed on the stock exchange; (iv) The headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank; and (v) The bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI. It will have to achieve capital adequacy of eight per cent from the very beginning. A high level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and 22 Alliance Business Academy
  23. 23. chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. The other recommendations are under consideration.  The banking industry in India is in a midst of transformation, thanks to the economic liberalization of the country, which has changed business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit mobilization and branch expansion. But with liberalization, it found many of its advances under the non-performing assets (NPA) list. More importantly, the sector has become very competitive with the entry of many foreign and private sector banks. The face of banking is changing rapidly. There is no doubt that banking sector reforms have improved the profitability, productivity and efficiency of banks, but in the days ahead banks will have to prepare themselves to face new challenges.Indian Banking: Key Developments1969  Government acquires ownership in major banks  Almost all banking operations in manual mode  Some banks had Unit record Machines of IBM for IBR & Pay roll1970- 1980  Unprecedented expansion in geographical coverage, staff, business & transaction volumes and directed lending to agriculture, SSI & SB sector  Manual systems struggle to handle exponential rise in transaction volumes --  Outsourcing of data processing to service bureau begins  Back office systems only in Multinational (MNC) banks offices 23 Alliance Business Academy
  24. 24. 1981- 1990  Regulator (read RBI) led IT introduction in Banks  Product level automation on stand alone PCs at branches (ALPMs)  In-house EDP infrastructure with Unix boxes, batch processing in Cobol for MIS.  Mainframes in corporate office1991-1995  Expansion slows down  Banking sector reforms resulting in progressive de-regulation of banking, introduction of prudential banking norms entry of new private sector banks  Total Branch Automation (TBA) in Govt. owned and old private banks begins  New private banks are set up with CBS/TBA form the start1996-2000  New delivery channels like ATM, Phone banking and Internet banking and convenience of any branch banking and auto sweep products introduced by new private and MNC banks  Retail banking in focus, proliferation of credit cards  Communication infrastructure improves and becomes cheap. IDRBT sets up VSAT network for Banks  Govt. owned banks feel the heat and attempt to respond using intermediary technology, TBA implementation surges ahead under fiat from Central Vigilance  Commission (CVC), Y2K threat consumes last two years 24 Alliance Business Academy
  25. 25. 2000-2003  Alternate delivery channels find wide consumer acceptance  IT Bill passed lending legal validity to electronic transactions  Govt. owned banks and old private banks start implementing CBSs, but initial attempts face problems  Banks enter insurance business launch debit cards3.3 Initial Phase of Nationalization:Government implemented the exercise of nationalization of significant part of the IndianBanking system in the year 1955, when Imperial Bank of India was Nationalized in that yearfor the stated objective of "extension of banking facilities on a large scale, more particularlyin the rural and semi-urban areas, and for diverse other public purposes" to form State Bankof India. SBI was to act as the principal agent of the RBI and handle banking transactions ofthe Union & State Governments throughout India. The step was in fact in furtherance of theobjectives of supporting a powerful rural credit cooperative movement in India and asrecommended by the "The All-India Rural Credit Survey Committee Report, 1954". StateBank of India was obliged to open an accepted number of branches within 5 years inunbanked centres. The seven banks now forming subsidiaries of SBI were nationalized in theyear 1960. This brought one-third of the banking segment under the direct control of theGovernment of India.The major process of nationalization was carried out on 19th July 1969, when the PrimeMinister of India, Mrs. Indira Gandhi announced the nationalization of 14 major commercialbanks in the country. One more phase of nationalization was carried out in the year 1980,when seven more banks were nationalized. This brought 80% of the banking segment in Indiaunder Government ownership. The country entered the second phase, i.e. the phase ofNationalized Banking with emphasis on Social Banking in 1969/70.3.4 TYPES OF BANKS AND THERE INTRODUCTION3.4.1PUBLIC BANKS:  DENA Bank 25 Alliance Business Academy
  26. 26.  Punjab National Bank  Union Bank Of India  Bank Of Baroda  Bank Of India3.4.2 PRIVATE BANKS:  ICICI Banks  KOTAK Mahindra Banks  AXIS Bank  HDFC Banks  INDUSIND Banks3.4.3Private sector Banks IntroductionICICI Bank:ICICI Bank is the largest private sector bank in India. To understand about this big bank,we need to understand how it became so big a force to reckon with. ICICI (Industrial CreditInvestment Corporation of India) promoted the ICICI bank in 1994 with its stake reducing to46% after the IPO in 1998. ICICI is a well-known name in India along with IDBI and wasformed in 1955 at the initiative of the World Bank, Indian Government and Indian Industries.Both of these institutions have an exceptional brand-image and one of the highest possibleratings from CRISIL and other rating organizations. ICICI can be considered an oligopolisticcorporation along with IDBI (please M2M me, if you want to discuss this!). ICIC listed inNYSE in 2000. In 2001 it underwent a tight marriage with Bank of Madura in a stock-onlyamalgamation. This was a tough marriage and I guess they are still suffering from thishiccup, which kind of substantiates their mediocre performance today, in my perspective.This and the merger with the ICICI Corporation have caused some management strain andsome tough merger time. I could only wish they come over this and serve the customers in abetter manner. 26 Alliance Business Academy
  27. 27. Kotak Mahindra Bank:Kotak Mahindra is one of Indias leading financial organizations, offering a wide range offinancial services that encompass every sphere of life. From commercial banking, to stockbroking, to mutual funds, to life insurance, to investment banking, the group caters to thediverse financial needs of individuals and corporate.The group has a net worth of over Rs. 7,100crore and has a distribution network of branches,franchisees, representative offices and satellite offices across cities and towns in India andoffices in New York, London, San Francisco, Dubai, Mauritius and Singapore. The Groupservices around 6.5 million customer accounts.The Kotak Mahindra Group was born in 1985 as Kotak Capital Management FinanceLimited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, andthats when the company changed its name to Kotak Mahindra Finance Limited.AXIS Bank:Axis Bank was the first of the new private banks to have begun operations in 1994, after theGovernment of India allowed new private banks to be established. The Bank was promotedjointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)and other four PSU insurance companies, i.e. National Insurance Company Ltd., The NewIndia Assurance Company Ltd., The Oriental Insurance Company Ltd. and United IndiaInsurance Company Ltd.The Bank today is capitalized to the extent of Rs. 405.17crores with the public holding (otherthan promoters and GDRs) at 53.09%.The Banks Registered Office is at Ahmadabad and its Central Office is located at Mumbai.The Bank has a very wide network of more than 1000 branches and Extension Counters (ason 31st March 2010). The Bank has a network of over 4055 ATMs (as on 31st March 2010)providing 24 hrs a day banking convenience to its customers. This is one of the largest ATMnetworks in the country. The Bank has strengths in both retail and corporate banking and is 27 Alliance Business Academy
  28. 28. committed to adopting the best industry practices internationally in order to achieveexcellence.HDFC Bank:The Housing Development Finance Corporation Limited (HDFC) was amongst the first toreceive an in principle approval from the Reserve Bank of India (RBI) to set up a bank in theprivate sector, as part of the RBIs liberalization of the Indian Banking Industry in 1994. Thebank was incorporated in August 1994 in the name of HDFC Bank Limited, with itsregistered office in Mumbai, India. HDFC Bank commenced operations as a ScheduledCommercial Bank in January 1995.HDFC Banks mission is to be a World-Class Indian Bank. The objective is to build soundcustomer franchises across distinct businesses so as to be the preferred provider of bankingservices for target retail and wholesale customer segments, and to achieve healthy growth inprofitability, consistent with the banks risk appetite. The bank is committed to maintain thehighest level of ethical standards, professional integrity, corporate governance and regulatorycompliance. HDFC Banks business philosophy is based on four core values - OperationalExcellence, Customer Focus, Product Leadership and People.As on 31st March, 2010 the authorized share capital of the Bank is Rs. 550crore. The paid-upcapital as on said date is Rs. 457,74,32,720/- (45,77,43,272 equity shares of Rs. 10/- each).The HDFC Group holds 23.73 % of the Banks equity and about 16.97 % of the equity is heldby the ADS Depository (in respect of the banks American Depository Shares (ADS) Issue).26.59 % of the equity is held by Foreign Institutional Investors (FIIs)..The shares are listed on the Bombay Stock Exchange Limited and The National StockExchange of India Limited. The Banks American Depository Shares (ADS) are listed on theNew York Stock Exchange (NYSE) under the symbol HDB and the Banks GlobalDepository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN NoUS40415F2002.INDUSIND Bank: 28 Alliance Business Academy
  29. 29. IndusInd Bank derives its name and inspiration from the Indus Valley civilisation - a culturedescribed by National Geographic as one of the greatest of the ancient world combining aspirit of innovation with sound business and trade practices.Mr. Srichand P. Hinduja, a leading Non-Resident Indian businessman and head of theHinduja Group, conceived the vision of IndusInd Bank - the first of the new-generationprivate banks in India - and through collective contributions from the NRI communitytowards Indias economic and social development, brought our Bank into being.The Bank, formally inaugurated in April 1994 by Dr. Manmohan Singh, Honourable PrimeMinister of India who was then the country‟s Finance Minister, started with a capital base ofRs.1,000 million (USD 32 million at the prevailing exchange rate), of which Rs.600 millionwas raised through private placement from Indian Residents while the balance Rs.400 million(USD 13 million) was contributed by Non-Resident Indians.IndusInd Bank is one of the new generation private-sector banks in India, which commencedits operations in 1994. The Bank caters to the needs of both Consumer & Corporate Clientsand has a robust technology platform supporting multi – channel delivery capabilities. TheBank enjoys a patronage of 2 million customers and has a network of 209 branches and 427ATMs spread over 168 geographical locations in 28 states and union territories across thecountry. The Bank also has a Representative Office in Dubai and London.The Bank‟s total business (deposits plus advances) as on December 31, 2009 crossed Rs.43,000 crore. The Bank is driven by state-of-the-art technology since its inception. It hasmulti-lateral tie-ups with other banks providing access to more than 21000 ATMs for itscustomers. It enjoys clearing bank status for both major stock exchanges - BSE and NSE -and three major commodity exchanges in the country – MCX, NCDEX, and NMCE. It alsooffers DP facilities for stock and commodity segments. The Bank has been bestowed with themandate of being a Settlement Banker for tea auctions at Kolkata, Siliguri, Coonoor,Coimbatore and Guwahati.During the quarter, in a pioneering initiative in „Green Banking‟ the Bank became the firstbank in Maharashtra to open a solar-power ATM. Subjects like sustainable development, 29 Alliance Business Academy
  30. 30. social responsibility and climate change are fast becoming part of the corporate vocabularyand IndusInd is at the forefront of this change in the Indian banking sector.The Bank has been awarded the highest P1+ rating for its Fixed Deposits and Certificates ofDeposit by CRISIL. Recently, CRISIL has reaffirmed its P1+ rating of IndusInd Bank‟s fixeddeposits and certificates of deposit program. The rating continues to reflect the Bank‟sestablished presence in the Commercial Vehicle (CV) financing business and the significantimprovement in its asset quality. The rating also features in the Bank‟s modest resource andearnings profile, and average capitalization levels.3.4.4 PUBLIC BANKS:DENA Bank:Dena Bank was founded o n 26th May, 1938 by the family of Devkaran Nanjee under thename Devkaran Nanjee Banking Company Ltd.It became a Public Ltd. Company in December 1939 and later the name was changed to DenaBank Ltd.In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now aPublic Sector Bank constituted under the Banking Companies (Acquisition & Transfer ofUndertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, inaddition to the business of banking, the Bank can undertake other business as specified inSection 6 of the Banking Regulations Act, 1949.MilestonesüOne among six Public Sector Banks selected by the World Bank for sanctioning a loan ofRs.72.3crores for augmentation of Tier-II Capital under Financial Sector Developmentalproject in the year 1995. One among the few Banks to receive the World Bank loan for technological up gradation and training. 30 Alliance Business Academy
  31. 31. Launched a Bond Issue of Rs.92.13crores in November 1996. Maiden Public Issue of Rs.180Crores in November 1996. Introduced Tele banking facility of selected metropolitan centers.Dena Bank has been the first Bank to introduce: Minor Savings Scheme. Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP). Drive-in ATM counter of Juhu, Mumbai. Smart card at selected branches in Mumbai. Customer rating system for rating the Bank Services.PUNJAB NATIONAL BANK:Punjab National Bank (PNB) (BSE: 532461), was registered on May 19, 1894 under theIndian Companies Act with its office in Anarkali Bazaar Lahore. Today, the Bank is thesecond largest government-owned commercial bank in India with about 5000 branches across764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bankin the world by the Bankers Almanac, London. The banks total assets for financial year 2007were about US$60 billion. PNB has a banking subsidiary in the UK, as well as branchesin Hong Kong, Dubai and Kabul, and representative offices in Almaty,Dubai, Oslo,and Shanghai.History:1895: PNB commenced its operations in Lahore. PNB has the distinction of being the firstIndian bank to have been started solely with Indian capital that has survived to the present.(The first entirely Indian bank, the Oudh Commercial Bank, was established in 1881in Faizabad, but failed in 1958.) PNBs founders included several leaders ofthe Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal,[1] Lala 31 Alliance Business Academy
  32. 32. Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi JaishiRam, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management ofthe Bank in its early years.1904: PNB established branches in Karachi and Peshawar.1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, butcontinued to operate in Pakistan.1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became BharatNidhi Ltd.1961: PNB acquired Universal Bank of India.1963: The Government of Burma nationalized PNBs branch in Rangoon (Yangon).September 1965: After the Indo-Pak war the government of Pakistan seized all the offices inPakistan of Indian banks, including PNBs head office, which may have moved to Karachi.PNB also had one or more branches in East Pakistan (Bangladesh).1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.1969: The Government of India (GOI) nationalized PNB and 13 other major commercialbanks, on July 19, 1969.1976 or 1978: PNB opened a branch in London.1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank ofIndia after the branch was involved in a fraud scandal.1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisitionadded Hindustans 142 branches to PNBs network.1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.1998: PNB set up a representative office in Almaty, Kazakhstan. 32 Alliance Business Academy
  33. 33. 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the timeof the merger with PNB, Nedungadi Banks shares had zero value, with the result that itsshareholders received no payment for their shares.PNB also opened a representative office in London.2004: PNB established a branch in Kabul, Afghanistan.PNB also opened a representative office in Shanghai.PNB established an alliance with Everest Bank in Nepal that permits migrants to transferfunds easily between India and Everest Banks 12 branches in Nepal.2005: PNB opened a representative office in Dubai.2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with twooffices, one in London, and one in South Hall. Since then it has opened a third branch inLeicester, and is planning a fourth in Birmingham.2008: PNB opened a branch in Hong Kong.2009: PNB opened a representative office in Oslo, Norway, and a second branch in HongKong, this in Kowloon.2010: PNB received permission to upgrade its representative office in the Dubai InternationalFinancial Centre to a branch.UNION BANK OF INDIA:The dawn of twentieth century witnesses the birth of a banking enterprise par excellence-UNION BANK OF INDIA- that was flagged off by none other than the Father of theNation, Mahatma Gandhi. Since that the golden moment, Union Bank of India has this farunflinchingly traveled the arduous road to successful banking a journey that spans 88 years.We at Union Bank of India, reiterate the objective of our inception to the profound thoughtsof the great Mahatma... "We should have the ability to carry on a big bank, to manageefficiently crores of rupees in the course of our national activities. Though we have notmany banks amongst us, it does not follow that we are not capable of efficiently 33 Alliance Business Academy
  34. 34. managing crores and tens of crores of rupees."Union Bank of India is firmly committed to consolidating and maintaining its identity as aleading, innovative commercial Bank, with a proactive approach to the changing needs ofthe society. This has resulted in a wide gamut of products and services, made available to itsvaluable clientele in catering to the smallest of their needs. Today, with its efficient, value-added services, sustained growth, consistent profitability and development of newtechnologies, Union Bank has ensured complete customer delight, living up to its imageof, “GOOD PEOPLE TO BANK WITH”. Anticipative banking- the ability to gauge thecustomers needs well ahead of real-time - forms the vital ingredient in value-based servicesto effectively reduce the gap between expectations and deliverables.The key to the success of any organization liew with its people. No wonder, Union Banksunique family of about 26,000 qualified / skilled employees is and ever will be dedicatedand delighted to serve the discerning customer with professionalism and wholeheartedness.Union Bank is a Public Sector Unit with 55.43% Share Capital held by the Government ofIndia. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Followon Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held byInstitutions, Individuals and Others.Over the years, the Bank has earned the reputation of being a techno-savvy and is a frontrunner among public sector banks in modern-day banking trends. It is one of the pioneerpublic sector banks, which launched Core Banking Solution in 2002. Under this solutionumbrella, All Branches of the Bank have been 1135 networked ATMs, with online Tele-banking facility made available to all its Core Banking Customers - individual as well ascorporate. In addition to this, the versatile Internet Banking provides extensive informationpertaining to accounts and facets of banking. Regular banking services apart, the customercan also avail of a variety of other value-added services like Cash Management Service,Insurance, Mutual Funds and Demat.The Bank will ever strive in its Endeavour to provide services to its customer and enhance 34 Alliance Business Academy
  35. 35. its businesses thereby fulfilling its vision of becoming “the bank of first choice in ourchosen area by building beneficial and lasting relationship with customers through aprocess of continuous improvement”.BANK OF BARODA:It has been a long and eventful journey of almost a century across 25 countries. Starting in1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centrein Mumbai is a saga of vision, enterprise, financial prudence and corporate governance.It is a story scripted in corporate wisdom and social pride. It is a story crafted in privatecapital, princely patronage and state ownership. It is a story of ordinary bankers and theirextraordinary contribution in the ascent of Bank of Baroda to the formidable heights ofcorporate glory. It is a story that needs to be shared with all those millions of people -customers, stakeholders, employees & the public at large - who in ample measure, havecontributed to the making of an institution. Our new logo is a unique representation of auniversal symbol. It comprises dual „B‟ letterforms that hold the rays of the rising sun. Wecall this the Baroda Sun.The sun is an excellent representation of what our bank stands for. It is the single mostpowerful source of light and energy – its far reaching rays dispel darkness to illuminateeverything they touch. At Bank of Baroda, we seek to be the sources that will help all ourstakeholders realize their goals. To our customers, we seek to be a one-stop, reliable partnerwho will help them address different financial needs. To our employees, we offer rewardingcareers and to our investors and business partners, maximum return on their investment.The single-color, compelling vermillion palette has been carefully chosen, for itsdistinctiveness as it stands for hope and energy.We also recognize that our bank is characterized by diversity. Our network of branches spansgeographical and cultural boundaries and rural-urban divides. Our customers come from awide spectrum of industries and backgrounds. The Baroda Sun is a fitting face for our brandbecause it is a universal symbol of dynamism and optimism – it is meaningful for our many 35 Alliance Business Academy
  36. 36. audiences and easily decoded by all.Our new corporate brand identity is much more than a cosmetic change. It is a signal that werecognize and are prepared for new business paradigms in a globalised world. At the sametime, we will always stay in touch with our heritage and enduring relationships on which ourbank is founded. By adopting a symbol as simple and powerful as the Baroda Sun, we hopeto communicate both.BANK OF INDIA:Bank of India (BoI), established on 7 September 1906 is a bank with headquartersin Mumbai. Government-owned since nationalization in 1969, It is one ofIndiasleading banks, with about 3140 branches including 27 branches outside India. BoI is afounder member of SWIFT (Society for Worldwide Inter Bank FinancialTelecommunications) in India which facilitates provision of cost-effective financialprocessing and communication services. The Bank completed its first one hundred years ofoperations on 7 September 2006.Previous banks that used the name Bank of India:At least three banks having the name Bank of India had preceded the setting up of thepresent Bank of India.A person named Ramakishen Dutt set up the first Bank of India in Calcutta (now Kolkata) in1828, but nothing more is known about this bank.The second Bank of India was incorporated in London in the year 1836 as an Anglo-Indianbank.The third bank named Bank of India was registered in Bombay(now Mumbai) in the year1864.The current bank:The earlier holders of the Bank of India name had failed and were no longer in existence bythe time a diverse group of Hindus, Muslims, Parsis, and Jews helped establish the present 36 Alliance Business Academy
  37. 37. Bank of India in 1906. It was the first bank in India promoted by Indian interests to serve allthe communities of India. At the time, banks in India were either owned by Europeans andserved mainly the interests of the European merchant houses, or by different communitiesand served the banking needs of their own community.The promoters incorporated the Bank of India on 7 September 1906 under Act VI of 1882with an authorized capital of Rs. 1crore divided into 100,000 shares each of Rs. 100. Thepromoters placed 55,000 shares privately, and issued 45,000 to the public by way of IPO on 3October 1906; the bank commenced operations on 1 November 1906.The lead promoter of the Bank of India was Sir Sassoon J. David (1849-1926). He was amember of the community of Baghdadi Jews, which was notable for its history of socialservice and included theSassoons. He was a prudent banker, and remained the ChiefExecutive of the bank from its founding in 1906 until his death in 1926.The first board of directors of the bank consisted of Sir Sassoon David, Sir CowasjeeJehangir, J. Cowasjee Jehangir, Sir Frederick Leigh Croft, Ratanjee Dadabhoy Tata,Gordhandas Khattau, Lalubhai Samaldas, Khetsety Khiasey, Ramnarain Hurnundrai,Jenarrayen Hindoomull Dani, Noordin Ebrahim Noordin.3.5 NPAs IN INDIAN BANKING SYSTEM:Undoubtedly the world economy has slowed down, recession is at its peak, globally stockmarkets have tumbled and business itself is getting hard to do. The Indian economy has beenmuch affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system,cutting of exposures to emerging markets by FIs, etc.Further, international rating agencies like, Standard & Poor have lowered India‟s creditrating to sub-investment grade. Such negative aspects have often outweighed positives suchas increasing for ex-reserves and a manageable inflation rate.Under such a situation, it goes without saying that banks are no exception and are bound toface the heat of a global downturn. One would be surprised to know that the banks and 37 Alliance Business Academy
  38. 38. financial institution in India hold nonperforming assets worth Rs. 110000crores Bankers haverealized that unless the level of NPAs is reduced drastically, they will find it difficult tosurvive.NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst ofturbulent structural changes overtaking the international banking institutions, and when theglobal financial markets were undergoing sweeping changes. In fact after it emerged as if theproblem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the mazeof defective accounting standards that still continued with Indian Banks up to the Ninetiesand opaque Balance sheets.In a dynamic world, it is true that new ideas and new concepts that emerge through suchchanges caused by social evolution bring beneficial effects, but only after levying a heavyinitial toll. The process of quickly integrating new innovations in the existing set-up leads toan immediate disorder and unsettled conditions. People are not accustomed to the newmodels. These new formations take time to configure, and work smoothly. The old is castaway and the new is found difficult to adjust. Marginal and sub-marginal operators are sweptaway by these convulsions. Banks being sensitive institutions entrenched deeply in traditionalbeliefs and conventions were unable to adjust themselves to the changes. They suffered easyvictims to this upheaval in the initial phase.Consequently banks underwent this transition-syndrome and languished under distress andbanking crises surfaced in quick succession one following the other in many countries. Butwhen the banking industry in the global sphere came out of this metamorphosis to re-adjust tothe new order, they emerged revitalized and as more vibrant and robust units. Deregulation indeveloped capitalist countries particularly in Europe, witnessed a remarkable innovativegrowth in the banking industry, whether measured in terms of deposit growth, credit growth,growth intermediation instruments as well as in network.During all these years the Indian Banking, whose environment was insulated from the globalcontext and was denominated by State controls of directed credit delivery, regulated interestrates, and investment structure did not participate in thi kars vibrant banking revolution.Suffering the dearth of innovative spirit and choking under undue regimentation, Indian 38 Alliance Business Academy
  39. 39. banking was lacking objective and prudential systems of business leading from earlystagnation to eventual degeneration and reduced or negative profitability. Continued politicalinterference, the absence of competition and total lack of scientific decision-making, led toconsequences just the opposite of what was happening in the western countries.Imperfect accounting standards and opaque balance sheets served as tools for hiding theshortcomings and failing to reveal the progressive deterioration and structural weakness ofthe countrys banking institutions to public view. This enabled the nationalized banks tocontinue to flourish in a deceptive manifestation and false glitter, though stray symptoms ofthe brewing ailment were discernable here and there.The government hastily introduced the first phase of reforms in the financial and bankingsectors after the economic crisis of 1991. This was an effort to quickly resurrect the health ofthe banking system and bridge the gap between Indian and global banking development.Indian Banking, in particular PSB‟s suddenly woke up to the realities of the situation and toface the burden of the surfeit of their woes.Simultaneously major revolutionary transitions were taking place in other sectors of theeconomy on account the ongoing economic reforms intended towards freeing the Indianeconomy from government controls and linking it to market driven forces for a quickintegration with the global economy. Import restrictions were gradually freed. Tariffs werebrought down and quantitative controls were removed. The Indian market was opened forfree competition to the global players. The new economic policy in turn revolutionaries theenvironment of the Indian industry and business and put them to similar problems of newmixture of opportunities and challenges. As a result we witness today a scenario of banking,trade and industry in India, all undergoing the convulsions of total reformation battling tokick off the decadence of the past and to gain a new strength and vigor for effective linkswith the global economy. Many are still languishing unable to get released from the old set-up, while a few progressive corporate are making a niche for themselves in the globalcontext.During this decade the reforms have covered almost every segment of the financial sector. Inparticular, it is the banking sector, which experienced major reforms. The reforms have taken 39 Alliance Business Academy
  40. 40. the Indian banking sector far away from the days of nationalization. Increase in the number ofbanks due to the entry of new private and foreign banks; increase in the transparency of thebanks balance sheets through the introduction of prudential norms and norms of disclosure;increase in the role of the market forces due to the deregulated interest rates, together withrapid computerization and application of the benefits of information technology to bankingoperations have all significantly affected the operational environment of the Indian bankingsector.In the background of these complex changes when the problem of NPA was belatedlyrecognized for the first time at its peak velocity during 1992-93, there was resultant chaos andconfusion. As the problem in large magnitude erupted suddenly banks were unable to analyzeand make a realistic or complete assessment of the surmounting situation. It was not realizedthat the root of the problem of NPA was cantered elsewhere in multiple layers, as muchoutside the banking system, more particularly in the transient economy of the country, aswithin. Banking is not a compartmentalized and isolated sector delinked from the rest of theeconomy. As has happened elsewhere in the world, a distressed national economy shifts apart of its negative results to the banking industry.In short, banks are made ultimately to finance the losses incurred by constituent industriesand businesses. The unpreparedness and structural weakness of our banking system to act tothe emerging scenario and de-risk itself to the challenges thrown by the new order, trying toswitch over to globalization were only aggravating the crisis. Partial perceptions and hastyjudgments led to a policy of ad-hoc-ism, which characterized the approach of the authoritiesduring the last two-decades towards finding solutions to banking ailments and dismantlingrecovery impediments. Continuous concern was expressed. Repeated correctional effortswere executed, but positive results were evading. The problem was defying a solution.The threat of NPA was being surveyed and summarized by RBI and Government of Indiafrom a remote perception looking at a birds-eye-view on the banking industry as a wholedelinked from the rest of the economy. RBI looks at the banking industrys average on amacro basis, consolidating and tabulating the data submitted by different institutions. It hascollected extensive statistics about NPA in different financial sectors like commercial banks, 40 Alliance Business Academy
  41. 41. financial institutions, urban cooperatives, NBFC etc. But still it is a distant view of oneoutside the system and not the felt view of a suffering participant. Individual banks inheritdifferent cultures and they finance diverse sectors of the economy that do not possessidentical attributes. The scenario is not so simple to be generalized for the industry as a wholeto prescribe a readymade package of a common solution for all banks and for all times.3.6 REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPAS INTHE INDIAN BANKING SYSTEM (IBS):The origin of the problem of burgeoning NPA‟s lies in the quality of managing credit risk bythe banks concerned. What is needed is having adequate preventive measures in placenamely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identifyaccounts that have potential to become non-performing.To start with, performance in terms of profitability is a benchmark for any business enterpriseincluding the banking industry. However, increasing NPA‟s have a direct impact on banksprofitability as legally banks are not allowed to book income on such accounts and at thesame time banks are forced to make provision on such assets as per the Reserve Bank ofIndia (RBI) guidelines. Also, with increasing deposits made by the public in the bankingsystem, the banking industry cannot afford defaults by borrowers since NPA‟s affects therepayment capacity of banks.Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the systemthrough various rate cuts and banks fail to utilize this benefit to its advantage due to the fearof burgeoning non-performing assets.Some of the reasons are:  After the nationalization of banks sector wise allocation of credit disbursements became compulsory. 41 Alliance Business Academy
  42. 42.  Banks were compelled to give credit to even those sectors, which were not considered to be very profitable, keeping in mind the federal policy. People in the agricultural sector were hardly interested in returning the loans as they were confident that the loans with the interest would be written off by the successive governments. The small scale industries also availed credit even though they were not sure of performing to the extent of returning the loans. Banks were also not in the position to press enough securities to cover the loans in calls of timings. Even if the assets were provided they proved to be substandard assets as the values that could be realized were very low. The slackness in effort by the bank authorities to collect or recover loan advances in time also contributes to the increase in NPA‟s. Lack of accountability of the officers, who sanctioned the loans led to a caste whole approach by the officers recovering the loans. Loans sanctioned to under servicing candidates due to pressure from the ministers and other politicians also led to the non recovery of debts. Poor credit appraisal system, lack of vision while sanctioning credit limits. Lack of proper monitoring. Reckless advances to achieve the budgetary targets. Lack of sincere corporate culture, inadequate legal provisions on foreclosure and bankruptcy. Change in economic policies/environment. Lack of co-ordination between banks.Some of the internal factors of the organization leading to NPA‟s are: Division of funds for expansion, diversification, modernization, undertaking new projects and for helping associate concerns, this is coupled with recessionary trends and failure to tap funds in the capital and debt markets. Business failure( product, marketing etc.,),inefficient management, strained labor relations, inappropriate technology, technical problems, product obsolescence etc., 42 Alliance Business Academy
  43. 43.  Recession , shortage of input, power shortage, price escalation, accidents, natural calamities, besides externalization problem in other countries leading to non payment of over dues.  Time/cost overrun during the project implementation stage.  Government policies like changes in the excise duties, pollution control orders.  Wilful default, siphoning off of funds, fraud, misappropriation, promoters/directors disputes etc.  Deficiencies on the part of the banks like delay in release of limits and delay in release of payments/subsidies by the government.3.7 RBI GUIDELINES ON INCOME RECOGNITION (INTERESTINCOME ON NPA‟s)In the peak crisis period in early Nineties, when the first Series of Banking Reforms wereintroduced, the working position of the State-owned banks exhibited the severest strain.Commenting on this situation the Reserve Bank of India has pointed out as under:"Till the adoption of prudential norms relating to income recognition, asset classification,provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks werereporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reformyear, i.e., 1992-93, the profitability of the PSB‟s as a group turned negative with as many astwelve nationalized banks reporting net losses. By March 1996, the outer time limitprescribed for attaining capital adequacy of 8 per cent, eight public sector banks were stillshort of the prescribed."Consequently PSB‟s in the post reform period came to be classified under three categories as-  Healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet) 43 Alliance Business Academy
  44. 44.  Banks showing currently profits, but still continuing to have accumulated losses of prior years carried forward in their balance sheets  Banks which are still in the red, i.e. showing losses in the past and in the present.Banks recognize income including interest income on advances on accrual basis. That is,income is accounted for as and when it is earned. The prima-facie condition for accrual ofincome is that it should not be unreasonable to expect its ultimate collection. However,NPA‟s involves significant uncertainty with respect to its ultimate collection.Considering this fact, in accordance with the guidelines for income recognition issued by theReserve Bank of India (RBI), banks should not recognize interest income on such NPA‟suntil it is actually realized.3.7.1 Income recognition – Policy  The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.  However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.  Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.  If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.3.7.2. Reversal of income: 44 Alliance Business Academy
  45. 45.  If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.  In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.3.7.3 Leased Assets The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period. The term net lease rentals would mean the amount of finance charge taken to the credit of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory depreciation and lease equalisation account. As per the Guidance Note on Accounting for Leases issued by the Council of the Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account should be transferred every year to the Profit & Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head Gross Income. 45 Alliance Business Academy
  46. 46. Appropriation of recovery in NPAs  Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.  In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.3.7.4 Interest Application:There is no objection to the banks using their own discretion in debiting interest to an NPAaccount taking the same to Interest Suspense Account or maintaining only a record of suchinterest in preformed accounts.3.7.5 Reporting of NPAs  Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks‟ global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I.  While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report. 46 Alliance Business Academy
  47. 47.  Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.3.8 Asset ClassificationCategories of NPAs (1) Standard Assets (2) Sub-Standard Assets (3) Doubtful Assets (4) Loss Assets(1) Standard Assets:Standard assets are the ones in which the bank is receiving interest as well as the principalamount of the loan regularly from the customer. Here it is also very important that in this casethe arrears of interest and the principal amount of loan do not exceed 90 days at the end offinancial year. If asset fails to be in category of standard asset that is amount due more than90 days then it is NPA and NPAs are further need to classify in sub categories.(2) Sub-standard Assets:With effect from 31 March 2005, a substandard asset would be one, which has remainedNPA for a period less than or equal to 12 month. The following features are exhibited bysubstandard assets: the current net worth of the borrowers / guarantor or the current marketvalue of the security charged is not enough to ensure recovery of the dues to the banks in full;and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debtand are characterised by the distinct possibility that the banks will sustain some loss, ifdeficiencies are not corrected. 47 Alliance Business Academy
  48. 48. (3) Doubtful Assets:A loan classified as doubtful has all the weaknesses inherent in assets that were classified assub-standard, with the added characteristic that the weaknesses make collection or liquidationin full, – on the basis of currently known facts, conditions and values – highly questionableand improbable.With effect from March 31, 2005, an asset would be classified as doubtful if it remained inthe sub-standard category for 12 months.(4) Loss Assets:A loss asset is one which considered uncollectible and of such little value that its continuanceas a bankable asset is not warranted- although there may be some salvage or recovery value.Also, these assets would have been identified as „loss assets‟ by the bank or internal orexternal auditors or the RBI inspection but the amount would not have been written-offwholly.3.9 IMPACT OF EXCESS LIQUIDITY:One should also not forget that the banks are faced with the problem of increasing liquidity inthe system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the systemthrough various rate cuts. Banks can get rid of its excess liquidity by increasing its lendingbut, often shy away from such an option due to the high risk of default. In order to promotecertain prudential norms for healthy banking practices, most of the developed economiesrequire all banks to maintain minimum liquid and cash reserves broadly classified into CashReserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in theform of cash reserves or by way of current account with the Reserve Bank of India (RBI),computed as a certain percentage of its demand and time liabilities. The objective is to ensurethe safety and liquidity of the deposits with the banks. 48 Alliance Business Academy
  49. 49. On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking companyshall maintain in India in the form of cash, gold or unencumbered approved securities, anamount which shall not, at the close of business on any day be less than such percentage ofthe total of its demand and time liabilities in India as on the last Friday of the secondpreceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBIsvaults and further infuses greater funds into a system. However, almost all the banks arefacing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. asa result of which, banks are little reluctant in granting loans to corporate.As such, though in its monetary policy RBI announces rate cut but, such news are no longerwarmly greeted by the bankers.3.10 HIGH COST OF FUNDS DUE TO NPAs:Quite often genuine borrowers face the difficulties in raising funds from banks due tomounting NPA‟s. Either the bank is reluctant in providing the requisite funds to the genuineborrowers or if the funds are provided, they come at a very high cost to compensate thelender‟s losses caused due to high level of NPA‟s. Therefore, quite often corporate prefer toraise funds through commercial papers (CPs) where the interest rate on working capitalcharged by banks is higher.With the enactment of the Securitization and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to payup the dues and the borrowers will have to clear their dues within 60 days. Once the borrowerreceives a notice from the concerned bank and the financial institution, the secured assetsmentioned in the notice cannot be sold or transferred without the consent of the lenders. 49 Alliance Business Academy
  50. 50. The main purpose of this notice is to inform the borrower that either the sum due to the bankor financial institution be paid by the borrower or else the former will take action by way oftaking over the possession of assets. Besides assets, banks can also takeover the managementof the company. Thus the bankers under the aforementioned Act will have the much neededauthority to either sell the assets of the defaulting companies or change their management.But the protection under the said Act only provides a partial solution. What banks shouldensure is that they should move with speed and charged with momentum in disposing off theassets. This is because as uncertainty increases with the passage of time, there is allpossibility that the recoverable value of asset also reduces and it cannot fetch good price. Iffaced with such a situation than the very purpose of getting protection under theSecuritization Act, 2002 would be defeated and the hope of seeing a must have growingbanking sector can easily vanish.3.11 Provisioning NormsGeneral:  In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a banks statutory auditors, if they so desire, could have a dialogue with RBIs Regional Office/ inspectors who carried out the banks inspection during the previous year with regard to the accounts contributing to the difference.  Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc. 50 Alliance Business Academy
  51. 51.  The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.  In conformity with the prudential norms, provisions should be made on the non- performing assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against sub-standard assets, doubtful assets and loss assets as below:a. Loss assets:The entire asset should be written off. If the assets are permitted to remain in the books forany reason, 100 percent of the outstanding should be provided for.b. Doubtful assets:  100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.  In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful: 51 Alliance Business Academy
  52. 52. Period for which the advance has been Provision considered as doubtful requirement (%) Up to one year 20 One to three years 30 More than three years: 60% with effect from March 31,2005. (1) Outstanding stock of NPAs as on March 31, 2004. 75% effect from March 31, (2) Advances classified as „doubtful‟ 2006. more than three years on or after 100% with effect from March April 1, 2004. 31, 2007.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under: As on31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub- standard asset to doubtful category.  As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002.  Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.Note: Valuation of Security for provisioning purposes 52 Alliance Business Academy